Missed Bitcoin? No Worries.

You may have missed your big shot with Bitcoin, but you may now get a chance at a second act with Ripple. Bitcoin, as you will recall is a cryptocurrency in which new coins are minted digitally and transferred back and forth to people through an open-source Internet protocol that doesn’t go through a central intermediary.

The coins are processed by servers that mine new coins via a mathematical formula that limits the total number that can ever be created to 21 million. Why 21 million? Who knows? In terms of market volatility, BitCoins in 2013 have ranged all over the value map from $13 to $250 in real dollars and his gotten a lot of attention – from the likes of the Winklevoss brothers to the Bitcoin Investment Trust which is a new fund composed entirely of BitCoins.

The primary problem with the Bitcoin lay in the mining part and the several minutes that it takes to get that done. If there is no centralized ledger as there is not with Bitcoins, and your funds disappear for minutes at a time in the Ether while you are waiting for a Bitcoin mining transaction to play out, yo can experience the sort of anxiety that gives rise to panic-induced market fluctuations – which happened in a big way just recently.

Ripple, on the other hand, while also an open source protocol, is based around a shared, public database. This database contains a ledger with account balances. Anyone can view the ledger and see a record of all activity on the Ripple network. In addition to information about balances, the ledger can also hold information about offers to buy or sell a currency or asset, creating the first distributed exchange. Participants in the network agree to changes in the ledger via a process called consensus. Consensus is reached by the network approximately every 2–5 seconds, allowing for trading of assets and settlement of transactions without any centralized clearing house. And, you get a key to recover any apparently compromised balances.

In addition to the payment network and distributed exchange, Ripple also includes its own internal Ripple currency, XRP (sometimes called ripples). Users of the Ripple network are not required to use XRP as a store of value or a medium of exchange. The network is currency agnostic. XRP exists to fulfill two primary network functions—to stop network spam and to act as a bridge currency. To stop network spam, a small amount of XRP must be used in each transaction, and this XRP is destroyed after use.

The XRP currency is the only currency in the Ripple system that does not entail counter-party risk: an XRP balance is not dependent on any organization backing it. Unlike IOU balances, it does involve exchange rate risk however. The creators of ripple created the network with 100 billion XRP, and gifted a for-profit company, Ripple Labs (originally called Opencoin), with 80 billion XRP. Ripple Labs intends to distribute 55 billion XRP to users of the network, and will keep the rest, in the hope that this XRP will grow in value over time.

This idea has given rise to the usual haters who claim that this arbitrary distribution will leave the founders sitting on around 50 billion ripples, and that is a devious and vulture-centric trait best left to venture capitalists and investment bankers. If that is devious, then so is every company that has ever gone public while leaving the bulk of its stock in the hands of its founders (and investors).

The cool thing about 100 billion Ripples is that, unlike the Federal Reserve Bank, they can’t print any more of them (to bail out bankers and insurance thieves).

As most of you are aware, the current banking system and capital structure is severely flawed and essentially broken. Who has not paid a bank a $15 “surcharge” to access their own money in say, a real estate transaction where you receive a distribution from your investment wired directly to your own account and your bank charges you for the privilege?

Accounts like Dwolla and PayPal are funded a few hours or days after the transfer is issued allowing someone (bank) to earn interest on the float. The entire system of banking has been ripe for disruption for a long time and it appears that finally, in addition to the impressive work of the early peer-to-peer lenders like Lending Club and Prosper, Ripple may succeed in breaking through the difficult barriers that the banks have imposed.

Full disclosure: I was a co-founder of iPeopleFINANCE, and early and unsuccessful entrant into the crowd-funded lending space. So, I know Chris Larsen, founder of e-Loan and then Prosper, and I know Chris to be a really talented guy with a lot of vision and a knack for organizing creatively and getting things done. Chris is the CEO of Ripple.

I suspect that Chris’s first avenue of attack will be the big credit card issuers who take as much as 4% for the privilege of having their cards used to charge purchases. All of the issuing banks get to keep a share of that 4% now. Their payoff is that they get to charge and collect massive interest when you are late and they don’t have to pay Master Card or VISA any of that money. If Ripple gets accepted ubiquitously, the issuing banks would have a new game in town and would have to deal with it by paying Ripple a share of that 4%. If those guys have any sense, they should be thinking about Ripple in the same way that the big record labels thought about Napster.

Now that Germany has started taxing Bitcoin assets and a federal judge in Texas just ruled that Bitcoins are a legitimate currency, I would start buying up all the Ripple I could get my hands on while it is still less than a penny. Just saying.

Write to me if you want to buy some Ripple, or if you just think I’m nuts at steve@netswitch.net. Long live the Internet!

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